Chart of the day…. or century? by Mark J. Perry

As I wrote last summer on CD, I’ve probably created and posted more than 3,000 graphics on CD, Twitter, and Facebook including charts/graphs, tables, figures, maps and Venn diagrams over the last 12 years. Of all of those graphics, I don’t think any single one has ever gotten more attention, links, re-Tweets, re-posts, and mentions than the one above (and previous versions), which has been referred to as “the Chart of the Century.” Here are some examples of those mentions from last year for the version of the chart with price data through December 2017.

• Marketwatch has featured the chart twice here and here and made this comment “When this chart’s creator, econ professor Mark Perry and the man behind the Carpe Diem blog, first posted it on Twitter, it was hailed as “stunning” and “one of the most important charts about the economy this century.”
• Barry Ritholz has featured various versions of the chart three times on his Big Picture Blog here, here and here.
• Bloomberg published an article last July titled “Chart of Century Gives Powell Gloomy Glimpse of Trade-War World,” with this opening:

A multi-colored graphic that’s made the rounds at the Federal Reserve hints at what Chairman Jerome Powell could face if President Donald Trump succeeds in throwing globalization into reverse: Higher prices for many goods and potentially faster inflation.

Plugged as possibly the chart of the century by economist and originator Mark Perry, it shows that prices of goods subject to foreign competition — think toys and television sets — have tumbled over the past two decades as trade barriers have come down around the world. Prices of so-called non-tradeables — hospital stays and college tuition, to name two — have surged.

• That report was followed in July with a CBS MoneyWatch article “Inflation risks, trade war costs, make Fed’s job much harder.”

A chart that has been making the rounds at the Fed from economist Mark Perry shows how falling prices for trade-sensitive things like TV sets and toys have helped offset rising costs for things like medical services, housing and education.

• More recently, Clemson University economist Bruce Yandle featured the chart in a March 2019 Washington Examiner op-ed titled “Rising prices, global competition, and the chart of the century“:

American Enterprise Institute economist Mark J. Perry is highly and justifiably respected for his ability to convey complicated economic relationships by way of rather simple charts and graphs. The most famous example of this, shown here, is called by some the “chart of the century.” The high praise comes about because the chart is loaded with information regarding the types of challenges faced by the Fed and other Washington policymakers. Perry’s most recent version reports price increases from 1998 through 2018 for 14 categories of goods and services along with the average wage and overall Consumer Price Index.

Based on yesterday’s BLS report for CPI price data through June, I’ve updated the chart above with price changes through June 2019. During the most recent 21.5-year period from January 1998 to June 2019, the CPI for All Items increased by exactly 57.6% and the chart displays the relative price increases over that time period for 14 selected consumer goods and services, and for average hourly earnings (wages). Seven of those goods and services have increased more than average inflation, led by hospital services (+210%), college tuition (+188%), and college textbooks (+183%). Average wages have also increased more than average inflation since January 1998, by 83%, indicating an increase in real wages over the last several decades.

The other seven price series have declined since January 1998, led by TVs (-97%), toys (-75%), software (-69%) and cell phone service (-53%). The CPI series for new cars, household furnishings (furniture, appliances, window coverings, lamps, dishes, etc.) and clothing have remained relatively flat for the last 21.5 years while average prices have increased by 57% and wages increased 83%. Various observations that have been made about the huge divergence in price patterns over the last several decades include:

a. The greater (lower) the degree of government involvement in the provision of a good or service the greater (lower) the price increases (decreases) over time, e.g., hospital and medical costs, college tuition, childcare with both large degrees of government funding/regulation and large price increases vs. software, electronics, toys, cars and clothing with both relatively less government funding/regulation and falling prices. As somebody on Twitter commented:

Blue lines = prices subject to free market forces. Red lines = prices subject to regulatory capture by government. Food and drink is debatable either way. Conclusion: remind me why socialism is so great again.

b. Prices for manufactured goods (cars, clothing, appliances, furniture, electronic goods, toys) have experienced large price declines over time relative to overall inflation, wages, and prices for services (education, medical care, and childcare).

c. The greater the degree of international competition for tradeable goods, the greater the decline in prices over time, e.g., toys, clothing, TVs, appliances, furniture, footwear, etc.

New:

d. The price series that has shown the greatest change recently is the CPI for Educational Books (mostly college textbooks). Textbook prices rose an average of nearly 6% annually between January 1998 and December 2016, nearly three times average inflation during that period of just above 2% annually. But starting in early 2017, the CPI for Educational Books has been flat, and actually fell by 2.15% over the last 12 months through June following an annual decrease of -4.0% the previous month – the two largest annual percentage declines in the history of the series going back to 1967.

We can expect future declines in the prices of college textbooks, as the traditional textbook market faces increasingly tough competition from alternative options including hundreds of “open textbooks” that have been funded, published, and licensed to be freely used, adapted, and distributed. The University of Minnesota’s Center for Open Education maintains an “Open Textbook Library” website that lists hundreds of textbooks in nearly 20 academic subjects that are available for free online or as a PDF file, or as a print copy at a low-cost ($33.50 for print copies from OpenStax). Just in the field of economics, there are more than 20 free open textbooks for Economics courses including Principles of Microeconomics, Principles of Macroeconomics, International Economics, Money and Banking, Economic Analysis and Principles of Political Economy.

Bottom Line: Based on the evidence in the chart above showing stagnating and falling textbook prices following half a century of rising prices, Hurricane Joseph appears to be hitting the college textbook market with a very large, tsunami of creative destruction called “The Open Textbook Effect.”

MP: I’ll continue to update the price chart every six months, look for the next version in January 2020 with data through December 2019.